FACTORS INFLUENCING LOCATION

INTRODUCTION:
It is well accepted in literatures that small and
medium enterprises (SMEs) play significant role in the socio-
economic development of a region and a country. It is empirically
tested that economic landscape of developing countries is dominated
by SMEs and they are called nucleus of economic activities for their
contribution to output and employment. SMEs constitute the
industrial base of many developing and developed nations.
Governments and researchers in many countries consider
industrialisation as a panacea for economic growth (Wong and
Yip, 1999). Although studies addressing the impact of
industrialisation on economic growth suggest inconclusive results,
government of some developing countries put high emphasis on
industrialisation for accelerating faster economic growth.

Historically the degree of industrialisation is heterogeneous across the

world both in regions and locations. Sridhar and Wan (2010) asserted
an interesting link between industrialisation, urbanisation, and
economic growth from the analysis of GDP contribution of cities to
the national economy of several countries including Brazil, India, and
China. They argued that localisation of industries in cities influences
cities’ ability to become engines of economic growth. The greater the
level of urbanisation, the greater the contribution of cities are
observed to the GDP and thus in economic growth. Thus urbanisation
has a positive impact on economic growth (Nguyen and
Nguyen, 2018). Researchers (Zhou and Liu, n.d.; Adhitama et
al., 2018) also argued that SMEs are the main force to promote
urbanisation. In other way round, it is postulated that SMEs tend to
localise in cities as they can efficiently access various business
facilities and infrastructures (Dutta, 2002). Thus, localisation of SMEs
has significant impact on the economic development of cities and
regions. Different development indicators like employment levels,
regional income levels, and growth rate are heavily dependent on the
location and investment choices of firms. So location decision of
SMEs and other firms has been a crucial aspect of political-
administrative planning for a considerable time now, in different
western economies (Assink and Groenendijk, 2009).

Location is crucial among many other factors that influence success of

industries. Therefore, study of location choice of industries is a
significant aspect of economic geography, regional planning, and
development. Large number of theories had been developed over the
last century about industrial location. These location theories as a
central component of economic geography tried to explain patterns of
location of industries and predict suitable location for industries to
locate. Yet no single theory is sufficient to explain why and how
individual firms select location and industries cluster in a region
(Jones and Woods, 2002). This implies that the location decision of
firms is often context specific and the complexity of such decisions is
often influenced by various behavioural, social, and locational
characteristics. Martyniuk-Peczek et al. (2017) claimed that existing
location theories and empirical studies do not focus on size difference
of firms which certainly has impact on location decision and SMEs
are often ignored from such studies. Very few researches could be
found explaining location behaviour of SMEs especially in the
context of Bangladesh. Thus, more researches need to be conducted to
better explain the location choice and cluster pattern of SMEs. Such
researches are expected to assist governments and policymakers to
diagnose locational needs of such SMEs and formulate appropriate
strategies for their development. Considering the significance of
SMEs in process of industrialisation, urbanisation, and economic
growth, this study aims to explore the factors influencing location
choice and clustering pattern of manufacturing SMEs in Khulna City.
Materialising this aim requires identifying the major category of
manufacturing SMEs, their geographic locations, and reasons behind
such location patterns in the context of Khulna City.

The paper is structured in five sections. A short review of the

prevailing theories and factors relating the industry location choice
follows this introduction. The ‘Methods’ section presents the
methodology. The ‘Results’ section presents the empirical findings.
Finally, follows the discussion and conclusion.
Literature review and propositions

Location choice of industries, in particular manufacturing industries,

is considered as a crucial topic of research for economic geographers
for nearly a century. It also received attention of economists, urban
planners, and policymakers as firm locations have impact on different
development indicators of a region. Thus, location theories had
become a central component of economic geography. Location
theories explain how economic and human activity relate to
geographical space and attempt to identify factors influencing location
decision of individual firm and emerging location pattern of industries
under specific context. Survey of general location theories developed
over the last century indicates two distinctive classes—(neo-) classical
or economic theories and behavioural theories. The classical theories
are based on the assumptions of ‘economic man’ and ‘isotropic space’
and the main focus of these theories on cost minimisation. These
theories hold that entrepreneurs have complete information about
decision parameters and act rationally based on cost benefit analysis
in choosing location and there is no variation in geographical spaces
(Weber, 1929; Predöhl, 1928). The neoclassical theories differ from
classical theories in that these supplement the assumptions with the
idea of market competition, revenue, internal economies of scale,
effect of varying combinations of production factors, and focused on
profit maximisation (Hotelling, 1929; Lösch, 1954; Hoover, 1948;
Isard, 1949; Smith, 1966). On the other hand, behavioural paradigm
considered location choice as a part of strategic investment decision
which is influenced by multiple factors in addition to cost of
production and profit. It also assumed that entrepreneurs are
boundedly rational and tend to suffice rather than optimise or
maximise. That means there is always a chance that an individual can
make a conscious location decision not to maximise profit when other
goals such as growth, risk minimisation, merely self-survival get
priority (Pred, 1967). Concepts like spatial cognition, mental maps,
and regional images of entrepreneurs form the core of these
behavioural theories (van Noort and Reijmer, 1999).

A recent paradigm of location analysis often termed as new economic

geography (Krugman, 1991; Gatfield and Yang, 2006) argues that the
flexible production structure results in extended social division of
labour and generates many specialised sub-sectors. This process
consequently engenders progressive externalisation of production
structure through network of processes and firms which again leads to
locational convergence. Incorporating transaction cost as spatial logic
for agglomeration, this thesis views firm as network of internal and
external linkages and every linkage incurs transaction costs. Since this
cost is a function of linkage length, the greater the distance over
which the linkage occurs, the greater would be the cost. The increased
cost associated with greater external transactions acts as a ‘spatial
pull’ for the firms to cluster around shorter distance to gain economies
(Scott, 1988; Henry, 1992). Such agglomerations further invigorate
the process of re-agglomeration as firms can benefit from lower
transaction cost, growth of specialised labour market, and diffusion of
knowledge as observed by Alfred Marshall (1920) in industrial
districts. This theory gives a new direction towards location decision
of firms especially it explains how economic structural change can
lead to agglomeration and associated geographic pattern of
industrialisation.

Another stream of research relating to industrial location attempted to

find out location factors important in the decision-making process of
modern industry. These location factors are the result of accumulation
of theoretical concepts and findings of industry-specific independent
studies done over many years. These factors are classified in different
ways in different literatures so as the numbers; definition and the
importance of factors affecting location vary from one business and
industry to another (van Noort and Reijmer, 1999; Jones and
Woods, 2002). Moreover, the effects of these factors are also found to
vary within the same industry due to change in technology, economic
condition, and time. These factors are interdependent and can be
attained at different degrees at different locations and so subjective
judgments and attitudes of entrepreneurs become important factors in
the location decision-making (Jones and Woods, 2002). Dicken and
Lloyd (1990) classified location factors as internal factors (e.g.
management, ownership structure, goals of organisations), location
factors (e.g. access to customers and suppliers, size of the space etc.),
and external factors (e.g. natural and regulatory conditions) while van
Noort and Reijmer (1999) categorised these factors as pull factors
(which drive industries towards a location, e.g. market access), push
factors (which forces industries to relocate to a new location, e.g.
unfavourable legislation), and keep factors (which influence industry
to remain in the current location, e.g. human resource inertia). Again
these factors can be grouped as ‘hard factors’ which include
production space, market proximity, and transports which are
measurable in terms of cost and secondly ‘softly factors’ quality of
life, attitude of community etc. which are immeasurable in terms of
cost and relate to subjective judgment (Martyniuk-Peczek et al. 2017).
Another classification by Vaillant et al. (2012) includes infrastructure
and economic motivation, personal motivation, and location-related
motivations.

Location factors that are found to be important from the theories and
empirical researches often include raw materials, transportation,
markets, labour, capital, water, industrial energy, and community
factors (Renner, 1947; Rawstron, 1958, Djwa, 1960). Historically raw
materials, transportation, and industrial energy are considered as
important location factors for industries. But due to improvement in
transportation system, the significance of these factors as locative
factors had declined in modern economy. Locating near the source of
raw materials is important for industries processing perishable and
weight loosing materials and where cost of raw materials is a
significant proportion in the total value of product (Renner, 1947).
Plants should not consider transportation just from cost consideration
rather should prioritise quantity and reliability of transportation over
cost minimisation while making selection decision (Jones and
Woods, 2002). Market as a location factor gained importance over
time. It is especially significant for industries producing weight
gaining products or products that need speedy delivery or perishable
products and require close contact with the customers (Renner, 1947).
It is often helpful to distinguish between consumer market and
industrial market while making location decision (Jones and
Woods, 2002). Firms producing consumer products tend to locate in
cities or regions with larger population whereas industrial goods
producers will locate near to industries having special need for that
product. Labour is considered as the most complicated among the
primary location factor (Djwa, 1960). The author also noted that a
number of issues like wage rate, productivity, skill, turnover, supply,
and labour laws complicate the labour-oriented location decisions.
Importance of labour also found to vary among industries. Labour in a
location also forms the market and thus has critical interrelation
between these two factors. Firms often tend to locate to a point which
offers essential amenities for the labour. Access to required supply of
water, capital, and energy (fuel, electricity etc.) attracts industries to a
location. The significance of locating to energy source had declined
with the advancement in technology that enhanced the efficiency of
machines and improved the transportation and transmission of energy.
Community factors indicate the attitude of government, public, and
labour. Favourable attitude towards industrialisation of the
community member is essential for establishing an industry.
Favourable attitude of government is often reflected through labour
legislation, taxation policy, sanitary, and protective services in a
location.

van Noort and Reijmer (1999) discussed location factors from a

different angle and argued that location decision is determined by
business characteristics, business environment, and external trends
and developments. The importance of location factors varies in
different industries according to their characteristics and environment
where they operate. Business trends like increasing environmental
legislation, increased role of human capital in decision-making,
development of business clusters, or inter-firm networking also have
significant influence on location choice. So the first proposition of
this study is as follows:
Proposition 1: Location selection is a strategic decision of
entrepreneurs which are influenced by a combination of location
specific, personal, and community factors.

In last two decades, academicians and policymakers had shown

immense interest in the concept of regional industry clusters. A large
body of literature can be found on this concept which mainly
discusses about the structures and characteristics of functioning
clusters, their importance and advantages, and also policy support for
their development in a region. But quite a less number of studies
focused on the evolution of a cluster and thus formed a recent
paradigm of research intended to explore why and where clusters
emerge and grow. Yamawaki (2002) found a number of factors
independently or in combination contributing to the emergence of
clusters including historical circumstances, existence of a large
manufacturing unit, prior existing supporting related industries like
universities, RandD institutions etc., pre-existence of related industry
cluster in neighbouring region, reduction in transportation costs due to
infrastructure improvement, technology transfers from other clusters
and foreign countries, and conducive regional government policy.
This finding was consistent with the findings of other scholars
(Porter, 1998 and Krugman, 1991) where they pointed out historical
circumstance/accidents, demand conditions, existence of one or few
innovative companies, technological spillovers, availability of human
capital and input supplies, and chance events as key drivers for cluster
development.

Proposition 2: Conducive government policy, locational

attractiveness/favourability, technology transfer and chance factor
independently or in combination influence formation of cluster at a
location.

The discussion in this section does not present an exhaustive list of

location theories and factors. Yet the review presents a comprehensive
idea about the development in the field of industrial location and
cluster formation. This insight from the analysis of location theories
and factors is essential to understand for not only the entrepreneurs
but also policymakers and development planners since creation of an
ideal fit between industry and the economic regions is one of the
important objectives of many development programs. This analysis
would also lay foundation for the subsequent analysis of this current
study where the location pattern of manufacturing SMEs would be
evaluated to understand locational strength and weaknesses of that
region which would provide useful insights for future development
planning.
Methods

This study had been conducted in two phases: in the first phase, major
manufacturing SMEs in Khulna City and their location pattern were
identified and in the second phase, reason behind such pattern was
explored. In the first phase, the study adopted the definition of
Bangladesh Bank (2015) (see Appendix, Table 2) and the SME
typology developed by SME Foundation (SMEF, 2013) in designing a
tally sheet to identify the major manufacturing SMEs and their
locations. Seven categories of manufacturing SMEs were included in
the tally sheet and manufacturing SMEs beyond these categories were
included as separate category ‘Others’. A city-wide walking survey
was conducted on the major roads of the city to locate the
manufacturing SMEs, put tally marks, and note location description
(e.g. holding number or identifiable landmarks) on separate tally sheet
assigned for each road or location. In addition to this, snowballing
technique was applied whereby the entrepreneurs of manufacturing
units were asked to identify locations of other similar firms. This
approach was felt logical since there was no reliable data from any
registering authority or industry associations on the numbers and
location of manufacturing SMEs in the city area and the conventional
wisdom suggests that entrepreneurs usually have information about
their competitors and their locations. Then the data were plotted on
map of Khulna City Corporation applying GIS mapping tools to
indicate location or cluster formation pattern. Five categories of
manufacturing SMEs were identified in Khulna City as the major
sectors in terms of number of firms. This survey was conducted
between February, 2018 and June, 2018. The optimised hot spot
analysis tool was applied to locate the potential cluster regions for
manufacturing SMEs across 31 wards (smallest administrative unit)
of the city. This tool is used to locate statistically significant hot spots
(spatially clustered high values) and cold spots (clustering of low
values) of incident data (points representing manufacturing SMEs). It
generated maps of statistically significant hot spots for different
categories of SMEs using Getis-Ord Gi* Statistic based on the given
incident data and polygon features (ward boundaries) applying
Fishnet aggregation method (ESRI, 2018). These spatial analyses
were performed using ArcGIS 10.5.

The second phase started after identifying the location pattern of SME
manufacturing sector. Qualitative multiple case study design was
applied in this phase to identify why such location pattern exists. Case
study method is suitable when the study addresses ‘why’ and ‘how’
questions; the researcher has little or no control over events, and the
focus of the study is on a contemporary phenomenon within some
real-life context (Yin, 2014). A semi-structured questionnaire was
used to interview 15 entrepreneurs (as cases). The entrepreneurs were
selected using purposive sampling technique. The entrepreneurs were
selected in a way that they are taken from all the five major categories
and their major clusters. Due to fear and reluctance of the
entrepreneurs in participating interview, referrals of bank personnel
working in SME loan sections of couple of banks were used to get
appointment and introduced with the entrepreneurs. Thus, chance of
personal bias related to convenience sampling technique was reduced.
Only founder entrepreneurs, those who made the location decision,
were interviewed.

Personal interviews with the entrepreneurs using a semi-structured,

open-ended questionnaire at their factory premises were the main
source of data. After conducting first two interviews, the
questionnaire was finalised through adding few important questions
revealed from those interviews and dropping the unnecessary ones.
For conducting the interview, an interview protocol was developed
containing some initial questions to understand the nature of the
business and questions regarding the ideal location factors, location
choice factors, and cluster formation. The questions were basically
included considering the research questions and based on the
understanding of previous researches in the field. To get detail about
the relevant issues, necessary probing (in the form of ‘why’ and ‘how’
questions) was done depending on the flow of conversation. The
interviews were recorded with the permission of the interviewee and
on condition of keeping data anonymous. Average duration of the
interviews was 30–35 min. All the interviewees were Bangladeshi
nationals and majority of them were illiterate to moderately educated.
So for the ease of getting data, the interviews were conducted in
Bangla and then transcribed and translated into English. Five
interviews were transcribed by two persons to check the variations
and data loss.

The transcribed data were then organised and coded using MaxQDA
2012 for further analysis. The transcribed data were first coded using
inductive open coding to generate ideas from the interviewees’
description. In addition, coding was also done using a provisional
code list generated from previous studies in the field to make those
more specific to the research questions. Through coding and recoding
of the transcripts at several cycles, a final code book on central theme
was developed which was necessary to apply consistent codes to data
representing similar ideas. The codes were then analysed to generate
categories of factors which then were used to explain two major
themes of the second phase of the study: location choice factors and
cluster formation. Matrices were constructed from the codes by
putting ‘1’ against each case when certain codes appear in his
interview transcript. Such matrices were used to identify patterns,
make comparisons, and reveal paradoxes to answer the research
questions. In addition to transcripts, field observation notes and
photographs of the sites were also analysed to substantiate the data
from the interview transcripts where applicable. Such use of multiple
sources of data was expected to increase validity of the findings
(Yin, 2014). Quotations were added to support the interpretation and
discussion.

Analysis started with the development of two propositions (expected

pattern) based on the review of prevailing theories and findings of
studies in the field as presented in the previous section. Pattern
matching was used to determine whether observed (empirical) pattern
matches with the expected (theoretical) pattern in the ‘
Discussion and conclusion’:
section of the study. Manufacturing SMEs in Khulna
Metropolitan City are found to cluster along the major roads of
the city and in the open spaces beside the embankment of river
Rupsha and along the railway route. Among the five SME
categories considered in the study, those which need relatively
large open space like saw mill and rice mills were found to
cluster more along the river side area and on railway land and
those which need relatively less space but more visibility and
direct contact with customers like furniture and engineering
workshops were found to concentrate along both sides of the
major roads. Location-specific factors like availability of low-
cost space, suitable transport facility, and agglomeration were
found to have more influence on location selection of the
manufacturing SME entrepreneurs of Khulna City. Prevailing
literatures on location choice, consistently with this finding,
demonstrate that the availability of space and accessibility to
improved transport system (Van Noort and Reijmer, 1999;
Martyniuk-Peczek et al., 2017); proximity to the central
business district and direct access to major roads (Kupke and
Pearce, 1998); and agglomeration of similar firms (Kim, 2015)
are important factors in location choice of SMEs. Unlike the
findings of Jones and Woods, 2002; Renner, 1947 which
suggest access to utility, availability of labourers, and proximity
to source of raw materials are important location selection
factors, this study found these factors to have less impact on
entrepreneur’s location selection in the context of Khulna.

Marshall (1920) postulated agglomeration invigourates re-

agglomeration of firms due to the efficiencies the firms get
through labour pooling, easy access to supplies and services,
and knowledge sharing. Albaladejo (2001) claimed that social
capital plays an important role in the development of the
clusters and explained it as the shared vision, social interaction,
mutual knowledge sharing, and trust among firms which
promote the generation and diffusion of innovations within the
cluster. Manufacturing SME entrepreneurs of Khulna also
prefer to locate at places where agglomeration of firms occurs
but they are more market focus in such decision, i.e. to get more
customer access. Moreover, such agglomeration allows the
firms to cooperate one another in times of need and creates a
sense of unity among them that provides mental support
against any unwanted external events such as extortions. Thus,
the role of social capital in this context is found to be more
defensive than invigourative since shared vision and collective
efforts to grow as an organised cluster were not evident from
the study. Moreover, the clusters found in different locations of
the city are naturally grown without any government initiative
and the firms in those clusters are not firmly integrated to each
other by means of business support or local business
associations.

The study also revealed that location choice of entrepreneurs is

influenced by personal factors including proximity to
residence, acquaintance with local people and location, ability
to arrange capital, and concern for family and children. These
findings are also consistent with the prevailing literatures.
Liang et al. (2001) claimed that small manufacturers’ location
choices are often influenced by personal factors like local
residence, local customers, access to funds and other facilities.
Mazzarol and Choo (2003) claimed that proximity to home was
more important than transport access in selecting location.
SME entrepreneurs in Khulna were seriously constricted by the
low ability to raise capital in selecting suitable locations since
access to low-cost loan is extremely limited for them due to
collateral requirement. This often compel them to confine at
smaller spaces than required for operation, find low-cost spaces
in lanes at the cost of market access and transport convenience.
It was also found from the analysis that SME manufacturers
consider community support is important for setting up and
running of manufacturing units within the city.
This study attempted to identify whether the entrepreneurs
select the ideal/optimum location or just satisfactory location
for their manufacturing units. It was important to understand
whether the SME entrepreneurs act rationally or make
tradeoffs in decision-making prioritising any specific factor
over others. An interesting contrast between what the
respondents consider as ideal location and the location they
ultimately choose was found from the study. Open space in
non-residential area was considered ideal due to possibility of
various pollutions but most of the SME manufacturing units
were found to locate in the residential areas of the city. This is
due to unavailability of open spaces and lack of capital to
acquire costly and scarce spaces in commercial areas and
outskirts of the city. Although the respondents believe that
locating factories in residential areas is unethical, they are
continuing their businesses in such locations as they have no
alternative to survive. Moreover, proximity to residence and
better quality of life in the city restrict them to move to the
outskirts of the city. Thus, it indicates that personal factors get
prioritised over location-specific factors while choosing
ultimate location which is also consistent with the findings of
(Martyniuk-Peczek et al. 2017) which shows that SME
entrepreneurs in suburbs of Poland favoured personal reasons
over cost.

REFERENCE:

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